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Thursday, January 7, 2010

Types of Economic Systems : Command - Mixed - Free/Market

There are three main types of economic systems. In a command (or planned) economy, the basic economic questions of what to produce, how to produce and for whom to produce are answered by the central planning agency of the government. This represents total government intervention as the government decides what's made how and for whom. The factors of production are owned by everybody and, in theory, the government combines these productive inputs in a manner that's best for all. Of course, this is very difficult to orchestrate, especially considering the size and intricacies of economies. The collapse of the Soviet Union and continued move away from command economies illustrates it's inability to function in reality.

In a pure free or market economy, the forces of supply and demand via the interactions between consumers and producers answers these three questions. Resources are allocated to those that can afford them and factors of production are privately-owned. Because of the profit incentive, there tends to be little waste and, thus, this system is far more efficient than the command economy. There is no government intervention in the pure free market. Because of this, there are too few merit and public goods, too many demerit goods, and not "enough" government protections (arguably).

All economies in reality are mixed. In other words, there are free market elements with some level of government intervention. It is the latter that determines whether or not an economy is closer to command or closer to free. A country like North Korea would be mixed, close to command; Sweden close to the middle thanks to an extensive welfare state; and Singapore would be close to free market because of little government intervention compared to much of the rest of the world.

Pros of free markets : efficient use of resources (through price mechanism), profit incentives created many high-quality g/sPros of command economies : little unemployment, presence of public and merit goods (and fewer demerit goods), resources may be used up at a slower pace, not as many clear winners and losersPros of mixed : can mix pros from both!Cons of each : see pros of other